Plans for the automatic enrolment of workers into a new pension system have been unveiled by the government.

From 2012, workers not in occupational pension schemes will be enrolled in "personal accounts" unless they opt out, under the White Paper's plans.

Staff will pay in 4% of their salaries and employers 3%, with an extra 1% from the government in tax relief.

Ministers believe the new scheme, called personal accounts, will boost annual pension savings by up to £8bn.

The proposals affect up to 10 million workers who are not in employer-funded schemes.

Launching details of the scheme, Pensions Secretary John Hutton said its aim was to overcome "the inertia and short-termism" which was stopping people making financial decisions, particularly in low-income households.

The system's key features are that employers will be forced to contribute if their staff join up and individuals will keep their accounts when they move jobs.

'Cheap to run'

The government argues that the personal accounts will be cheap to run.

Responding to fears that accumulated pension savings will simply erode entitlements to means-tested pension credits, ministers estimate that by 2050, nine out of ten pensioner households will benefit if they save in personal accounts.

PERSONAL ACCOUNTS EXPLAINED

Employees compelled to join the scheme, unless they already have a good workplace pension or choose to opt out

Contributions will be paid on earnings between £5,000 and £33,500 p.a.

There will be an annual ceiling on total contributions of £5,000

People will not be able to transfer funds from existing pension plans

Contributions will be collected centrally and paid into a choice of investment funds

Start date for personal accounts will be 2012

Personal accounts part of a wider pension shake-up involving a raising of the state pension age to 68

"Without an increase in private savings, future generations could retire poorer than today's pensioners and poorer than they expect to be," the White Paper said.

The government hopes the scheme will help plug the gap in the nation's retirement savings and supplement the continuing state pension and private pension systems.

The idea was first proposed by Lord Turner's Pensions Commission to ensure that more people save for retirement.

The new scheme will be set up by a delivery authority and then run by an independent personal accounts board similar to a set of pension fund trustees.

Warm welcome

The government now believes that seven million people are failing to save enough for their retirement - substantially fewer than previous estimate of up to 12 million made by Lord Turner.

The publication of the White Paper outlining the government's proposals drew widespread support.

The Investment Managers Association said they provided the best choice for low cost pension provision.

Its chief executive Richard Saunders said: "The centrally administered model works best for small employers by providing a single point of contact for them and the minimum of red tape."

Gordon Lishman, director general of the charity Age Concern said: "Personal accounts will offer a beacon of hope to millions of people struggling to find their way through the pensions wilderness.

"The proposals put forward in this White Paper are good news for anyone without access to a decent occupational pension, many of whom are women," he added.

The TUC welcomed the plans as well.

"Compulsory employer contributions are a major gain for people at work," said TUC general secretary Brendan Barber.

"In particular, we welcome the government's rejection of employer lobbying for a waiting period before employees can join or rejoin the scheme in each new job."

However, the Association of British Insurers said that the plans needed some alteration.

It said the contribution cap was too high and that there was still some confusion about how personal accounts would interact with means-tested benefits.